What is an Innovative Finance ISA?

An Innovative Finance ISA (IFISA) is a type of ISA that lets you hold peer-to-peer (P2P) lending investments tax-free. Instead of depositing money in a savings account (Cash ISA) or buying shares (Stocks and Shares ISA), your money is lent to borrowers (individuals or businesses) through a P2P lending platform, and you earn interest on those loans. The interest is tax-free within the ISA wrapper. IFISAs were introduced in April 2016.

Are Innovative Finance ISAs safe?

IFISAs carry significantly more risk than Cash ISAs. Your capital is NOT protected by the Financial Services Compensation Scheme (FSCS) — if the borrowers default on their loans, you could lose some or all of your money. The P2P platform itself may also fail. However, most platforms spread your money across many loans to reduce risk, and some offer provision funds that cover defaults (though these are not guaranteed). IFISAs are classified as investments, not savings — only invest money you can afford to lose.

What returns can I expect from an IFISA?

Typical IFISA returns range from 3–8% per year, depending on the platform, loan type, and risk level. Higher returns come with higher risk of borrower defaults. Property-backed loans typically offer 4–7%, while unsecured personal loans offer 3–6%. Some platforms offering higher rates (8%+) carry substantially higher risk. Always compare the net return (after defaults and fees) rather than the headline rate. Past returns are not guaranteed.

Does the £20,000 ISA allowance apply to IFISAs?

Yes — the IFISA shares the overall £20,000 annual ISA allowance with your other ISAs (Cash ISA, Stocks and Shares ISA, Lifetime ISA). You can split the allowance however you like between ISA types. For example, you could put £10,000 in a Cash ISA, £8,000 in a Stocks and Shares ISA, and £2,000 in an IFISA. From April 2024, you can open multiple ISAs of the same type in the same tax year.

Innovative Finance ISA (IFISA) Guide — Peer-to-Peer Lending in an ISA | PocketWise

An Innovative Finance ISA lets you earn tax-free interest by lending your money through peer-to-peer platforms. Here’s how they work and whether they’re right for you.

How IFISAs Work

Element	Detail
ISA type	Innovative Finance ISA (IFISA)
Introduced	April 2016
Annual allowance	Part of your £20,000 overall ISA allowance
Tax-free	Yes — interest earned is completely tax-free
How it works	Your money is lent to borrowers through a P2P platform; you earn interest
Risk	Higher than Cash ISA — borrowers can default, capital is at risk
FSCS protection	No — not covered by the £85,000 deposit guarantee
Withdrawals	Depends on the platform — may be restricted until loans mature

ISA Comparison

Feature	Cash ISA	Stocks & Shares ISA	IFISA	Lifetime ISA
Returns	4–5% (2026)	Variable (historically ~7–10%/year long term)	3–8% typical	Cash or investment returns + 25% government bonus
Risk to capital	None (FSCS protected)	Yes (market risk)	Yes (borrower default risk)	Depends on type
FSCS protection	Yes (£85,000)	Yes (£85,000 for platform failure, not investment losses)	No	Depends on type
Access	Easy (instant or notice)	Easy (sell investments)	Restricted — may need to wait for loans to mature	Penalty for early withdrawal (except house purchase/age 60)
Tax-free	Yes	Yes	Yes	Yes
Best for	Emergency fund, low risk	Long-term growth	Higher returns, comfortable with risk	First home or retirement

Risk vs Return

Risk level	Typical return	Loan type	Examples
Lower risk	3–5%	Property-backed, first charge	Secured against property
Medium risk	5–7%	Business loans, development finance	Secured or partially secured
Higher risk	7–10%+	Unsecured personal loans, higher-risk businesses	No security — rely on borrower repaying

Key Risks

Risk	Detail
Borrower default	Borrowers may not repay — you could lose some or all invested money
Platform failure	The P2P platform itself could go bust (wind-down plans should be in place)
Illiquidity	You may not be able to withdraw until loans mature — secondary markets exist but aren’t guaranteed
No FSCS protection	Unlike a bank, your money isn’t protected if things go wrong
Provision fund depletion	Some platforms have default funds, but these can run out in a downturn
Concentration risk	Lending to a small number of borrowers increases risk

How Returns Compare to Cash ISAs

Scenario	Cash ISA (4.5%)	IFISA (6%)	Difference
£10,000 invested for 1 year	£450	£600	+£150
£10,000 invested for 3 years	£1,412	£1,910	+£498
£10,000 invested for 5 years	£2,462	£3,382	+£920

But: The IFISA figures assume no defaults. Even a small default rate reduces returns significantly. And your capital is at risk.

Provision Funds

Feature	Detail
What they are	A reserve fund set aside by some platforms to cover borrower defaults
How they work	If a borrower misses payments, the provision fund pays you instead
Are they guaranteed?	No — they can be depleted if too many borrowers default
Coverage	Varies — some platforms cover 100% of defaults (if fund is sufficient), others cover a percentage

Tax Benefits

Tax position	Without ISA	With IFISA
Personal Savings Allowance (PSA)	First £1,000 tax-free (basic), £500 (higher)	N/A — all interest tax-free
Interest above PSA	Taxed at your marginal rate (20/40/45%)	Tax-free
Reporting	Must declare on Self-Assessment	No reporting needed

Is the Tax Benefit Worth It?

Annual P2P interest	Tax saved (20% taxpayer, above PSA)	Tax saved (40% taxpayer)
£500	£0 (within PSA)	£0–£200 (may exceed PSA)
£1,500	£100	£400
£3,000	£400	£1,000

The tax benefit is most valuable for higher-rate taxpayers and those with large P2P holdings.

Who IFISAs Suit

Profile	Suitability
Want higher returns than cash savings	Good fit — but understand the risks
Comfortable with investment risk	Good fit
Already maxing out Cash ISA and S&S ISA	Consider for diversification
Higher-rate taxpayer with P2P investments outside ISA	Good fit — significant tax savings
Need instant access to money	Poor fit — access can be restricted
Can’t afford to lose any capital	Not suitable — use a Cash ISA instead
New to investing	Probably not suitable — start with a Stocks and Shares ISA for diversified investing

Important Considerations

Factor	Detail
Diversification	Spread across many loans — don’t put all your ISA in one IFISA
Platform due diligence	Check the platform is FCA-authorised and has a wind-down plan
Auto-invest vs manual	Auto-invest spreads your money automatically; manual lets you choose loans
Loan terms	Shorter terms (1–3 years) give more flexibility than longer terms
Exit options	Check if there’s a secondary market to sell loans early
Maximum ISA allocation	Don’t over-allocate — most of your ISA should be in lower-risk products